TIRANA, Jan. 5 – Albania lost 11 places in the Best Countries for Doing Business report published by prestigious American business magazine Forbes, ranking 69 out of 144 countries and lagging behind in regional competitiveness.
The 2015 ranking was affected by poor performance in innovation, property rights, tax burden and corruption which rank Albania 99th to 118th.
“Complex tax codes and licensing requirements, a weak judicial system, endemic corruption, poor enforcement of contracts and property issues, and antiquated infrastructure contribute to Albania’s poor business environment and make attracting foreign investment difficult,” Forbes noted.
Only Bosnia and Herzegovina and Serbia ranked worse than Albania among regional EU aspirants in the 2015 report at 78th and 83rd.
The report also warns of spillover effects from top trading partner Italy which is expected to face another difficult year in 2016 and neighboring Greece, which is forecast to plunge into new recession. Italy and Greece are the hosts of about 1 million Albanian migrants and key sources of migrant remittances and foreign direct investment.
“Strong trade, remittance, and banking sector ties with Greece and Italy make Albania vulnerable to spillover effects of debt crises and weak growth in the eurozone,” notes Forbes.
The Forbes ranking is considerably better compared to the latest Doing Business report by the World Bank where Albania lost 35 places to rank 97th out of 189 countries, lagging behind all regional EU aspirant competitors including Macedonia, Montenegro, Turkey, Serbia, Kosovo and Bosnia and Herzegovina. A sharp deterioration in dealing with construction permits and paying taxes were the key reasons for the poor performance in the 2016 flagship Doing Business Report.
The increase of the corporate income tax by 5 percent to 15 percent in 2014, when the Socialist Party-led government lifted the 10 percent flat tax regime to shift to progressive taxation is also estimated to have negatively affected Albania’s competitiveness on a regional scale.
Only Albania and Serbia apply a 15 percent corporate income tax rate compared to flat tax rates of 9 to 10 percent in other regional EU aspirant countries.
The latest Paying Taxes report published by the World Bank and the PwC audit firm shows Albania has one of the highest tax rates among regional EU aspirants with a total tax rate as a percentage of commercial profit of 36.5 percent lower only compared to Serbia’s 39.7 percent and Turkey’s 40.9 percent, both of which are considerably larger markets.
Key taxes such as the corporate income tax and the withholding tax on dividends, rents and capital gains will remain unchanged at 15 percent even in 2016 after their increase by 5 percent in the past couple of years, defying business calls for a return to the 10 percent flat tax.
The situation has also affected Albania’s ability to attract foreign direct investment in sectors other than oil and gas and energy where major projects such as the Trans Adriatic Pipeline and the construction of major hydro-power plants are already underway.
2016 prospects
The Albanian economy is expected to face another tough year in 2016 despite forecasts of a slight recovery fuelled by an expected boost in energy-related foreign direct investment and positive effects from reforms in the energy sector and the nationwide campaign against informality.
Sluggish domestic consumption, public debt at around 72 percent of the GDP, non-performing loans at 20 percent, exports and lending struggling to recover to positive growth rates and an ongoing decline in migrant remittances hint Albania will face another tough year after the economy is expected to accelerate to 2.7 percent in 2015 following poor growth rates of 1 to 2 percent in the 2012-2014, an average of 3 percent in 2010 and 2011 and a pre-crisis decade of 6 percent.
In addition, the uncertain economic outlook on Albania’s top trading partners is expected to continue having a negative impact on Albania’s economy in the next couple of years.
A modest recovery in Italy and a new recession in Greece will further affect Albania’s exports, investments and remittances from the two neighboring countries, the hosts of more than 1 million Albanian migrants.
A sharp decline in international oil and base metal prices has also strongly affected investments and jobs and government revenue from the royalty tax in one of the top exporting industries.
A nationwide campaign in the electricity sector to reduce grid losses and collect unpaid bills has proved efficient lifting the hydro-dependent domestic electricity-generation operators out of financial collapse.
However, a similar campaign against rampant tax evasion, estimated at more than 30 percent of the GDP, launched in Sept. 2015 has proved a double-edged sword for public finances which are failing to recover even after thousands of businesses previously operating informally registered with authorities in the past few months.
Foreign direct investment prospects for 2016 seem more optimistic as the major Trans Adriatic Pipeline bringing Caspian gas to Europe has already launched its construction works in its Albania section and Norway’s Statkraft continues the construction of Devoll hydropower plant, the biggest investment in renewable energy in the past three decades in Albania.
